Bridging loans are a rising star as far as finance is concerned. Nowhere is this more accurate than in the property development industry. Many property developers regularly turn to bridging loans as a means of funding their projects, owing to their strong benefits. Bridging loans are quick, capable of raising large sums of capital, and boast flexibility in repayment terms. These qualities make bridging loans perfect for such a competitive industry.

However, while bridging loans have been widely adopted in the property development industry, they remain a fairly niche form of finance. Because of this, many would-be borrowers are reluctant to use bridging loans, unsure of whether the loans can suit their needs. One such area of interest is whether it is possible to use a bridging loan to pay stamp duties.

In this article, we will shed some light on this question, break down what bridging loans are, how they work, and whether you can use one to pay your stamp duty. Let’s get started.

What is a bridging loan?

Bridging loans are a type of secured loan, meaning they require assets to be used as collateral as part of the loan agreement. They aim to “bridge” the gap between the purchase of an asset, and a long-term form of finance. These two factors are largely responsible for the benefits of bridging loans, and how they work as a whole.

Bridging loans are swift and flexible largely due to this requirement of collateral. Because of this security, bridging loan lenders don’t need to place as much emphasis on traditional factors, such as credit rating or income, as other unsecured loans will. Provided the available assets are of sufficient value for the amount requested, bridging loan applications can be processed and approved rapidly. Borrowers can also raise as much or as little capital as they choose, provided they have assets to back up the requested loan value.

While the use of collateral allows bridging loans to offer these key advantages, it also poses some level of risk to borrowers. Once assets are submitted for use as collateral, the lender will place a lien on them. In short, this lien grants lenders the legal right to seize the assets if borrowers cannot repay. In such a case, the lender is entitled to seize assets up to the value of the loan that remains outstanding. Naturally, this does present a risk to borrowers, particularly those in a difficult financial position. As such, exercising caution when taking out a bridging loan is a good idea.

How does a bridging loan work?

Collateral takes centre stage when it comes to bridging loans, and an applicant’s assets will play a significant role during the application. At this point, a prospective borrower would request an amount, declare the value of their assets, and declare the Loan to Value percentage, or LTV. The former two points are self-explanatory, and the latter essentially refers to how much of a deposit the borrower can make for their purchase. For example, if a borrower could put forward a 20% deposit, they would request an LTV of 80%. Most bridging loan lenders are willing to accept an LTV of around 70%.

Once the requisite information has been submitted, including the type and value of collateral assets, the application will be approved or rejected, primarily based on asset value and cost. Assuming the application is approved, borrowers can expect to receive the funds within as little as 48 hours. Once the funds are received, the borrower can purchase the asset or property of their choice.

After the transaction, the final step is to repay the bridging loan. The method of repayment is commonly known as an exit strategy, and can be anything from obtaining a more long-term form of finance, such as a mortgage, or selling off an asset to repay the loan in full. It is essential that borrowers have a strong exit strategy in place before taking out a bridging loan, due to the very short-term nature of this method of finance. Bridging loans typically last no more than 12 months, making it a difficult scramble for a solution if you act without making adequate preparations.

What is stamp duty?

Stamp duties, or the Stamp Duty Land Tax (SDLT), are taxes imposed on the purchase of land and property. It applies to both freehold and leasehold properties, and can be a relatively high or low cost depending on certain factors. This can lead to some uncertainty for new property buyers, and receiving a large SDLT bill can come as quite a surprise indeed. If you are unprepared to pay this tax, it could pose an unforeseen issue to your finances.

Can I use a bridging loan to pay my stamp duty?

Bridging loans are most commonly used to raise the funds required to purchase an expensive asset such as property or land. However, this is not the only application of bridging loans. They can be used for a much wider range of purposes, with one such example being the payment of stamp duty. Bridging loans specialise in covering the shortfall of a purchase or unexpected costs, and are perfectly equipped for this kind of situation.

Stamp duties can come as a surprise cost for some, or not be factored into the overall cost of a property purchase through a simple mistake. Whatever the case, a property buyer may not always have the appropriate sum on hand to pay their stamp duty. In this case, a bridging loan could serve as a viable and effective solution, as it can raise the necessary sum quickly and flexibly, making sure your stamp duty isn’t a problem for long.

Wrapping up

All in all, bridging loans offer an effective means of paying your stamp duty, whether it comes as a surprise or not. Bridging loans specialise in offering speed and flexibility in loan amounts, making them perfect for a payment such as Stamp Duty Land Tax. However, it isn’t something to jump into without prior preparation, as bridging loans require assets to be sued as collateral. If you don’t apprise yourself of the risks and prepare accordingly, your personal finances could be negatively affected. As such, it is important to obtain professional financial advice before you take action.